Farm segment-driven demand outlook remains strong for Balkrishna Industries

Raw material/freight costs will however weigh on its near term margins

The stock of the country’s largest tyre company by market capitalisation, Balkrishna Industries, was up 14 per cent over the last few trading sessions. The gains came on the back of a strong March quarter (Q4FY22) performance, healthy volume outlook and expectations of market share gains.

The near-term trigger for the off-highway tyre maker has been the March quarter show.  Aided by strong growth across segments, Balkrishna Industries posted better than expected revenue growth performance in the March quarter. The company, which makes tyres for agricultural, industrial and off-the-road applications, posted a 36 per cent year-on-year sales growth with gains coming from both volumes (10 per cent) and price hikes.

While the agricultural segment, which accounts for two thirds of sales, has been the key driver of growth given robust crop prices, mining and construction segments too witnessed good growth. The management has highlighted that demand growth remains strong across segments and geographies. Brokerages, too, expect robust growth going ahead.

Siddhartha Bera and Kapil Singh of Nomura Research expect healthy double-digit growth for Balkrishna Industries to sustain in the near term, given a sharp jump in crop prices aiding farmer incomes and increases in metal commodity prices driving construction and mining activity.

What should help tap the growth across segments is capacity expansion. While volumes for the year (FY22) were up 27 percent to 2.9 lakh tonnes, the recent capacity addition of 55,000 tonnes at the Bhuj plant, could take volumes 3.3 lakh tonnes in FY23 at max capacity, according to Anand Rathi Research. The company continues to operate at peak capacity and deferred the capital expenditure at the Waluj plant to meet current demand requirements.

The other factor the street will keep an eye on are margins. While gross margins contracted by 410 basis points to 54.7 per cent due to raw material inflation, they were better than what the Street was working with given the gains from higher realisations. Operating profit margins (OPM) were down over 800 basis points (40 basis points sequentially) to 22.9 per cent on higher rubber, freight and energy costs.

The company indicated that higher freight costs was responsible for a 400 basis points impact on margins on a sequential basis. The company had raised prices at the start of March by 3 per cent and intends to raise them further by 3-4 per cent next month to counter the cost inflation. Though the company expects long term OPM to be in the 28-30 per cent range, for the next year margins would be around 24-25 per cent.

While there will be margins pressures for the company, analysts led by Jinesh Gandhi of Motilal Oswal Research expect Balkrishna’s outperformance to the specialty tyre industry to continue, driven by expansion of its product portfolio and ramp-up in the OTR segment, with scope to strengthen its competitive positioning. At the current price, the Balkrishna is trading at just under 26 times its FY23 earnings estimates. Investors can consider the stock on dips.